ACCA F8 - Audit and Assurance Revision Kit 2016

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as
negative for the forthcoming financial year. As a result of this, the company has been slow in paying its suppliers
and some are threatening legal action to recover the sums owing.
Due to its financial difficulties, Strawberry missed a loan repayment and, as a result of this breach in the loan
covenants, the bank has asked that the loan of $4.8m be repaid in full within six months. The directors have decided
that in order to conserve cash, no final dividend will be paid in 20X2.
Financial statements extracts for year ended 30 April:
DRAFT ACTUAL
20X2 20X1
$m $m
Current Assets
Inventory 3.4 1.6
Receivables 1.4 2.2
Cash – 1.2
Current Liabilities
Trade payables 1.9 0.9
Overdraft 0.8 –
Loans 4.8 0.2
Required
(b) Explain the potential indicators that Strawberry Kitchen Designs Co is not a going concern. (6 marks)
(c)
(d)
Describe the audit procedures that you should perform in assessing whether or not the company is a going
concern.
(6 marks)
Having performed the going concern audit procedures, you have serious concerns in relation to the going
concern status of Strawberry. The finance director has informed you that as the cash flow issues are short
term he does not propose to make any amendments to the financial statements.
Required
(i)
(ii)
State Kiwi & Co’s responsibility for reporting on going concern to the directors of Strawberry Kitchen
Designs Co; and
(2 marks)
If the directors refuse to amend the financial statements, describe the impact on the auditor’s report.
(3 marks)
(Total = 20 marks)
117 Clarinet (06/14) 39 mins
Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is
funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 2014.
Clarinet has experienced significant growth in previous years; however, in the current year a new competitor,
Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market
share from Clarinet. One of Clarinet’s larger customers has stopped trading with them and has moved its business
to Drums. In addition, a number of Clarinet’s specialist developers have left the company and joined Drums.
Clarinet has found it difficult to replace these employees due to the level of their skills and knowledge. Clarinet has
just received notification that its main supplier who provides the company with specialist electrical equipment has
ceased to trade.
Clarinet is looking to develop new products to differentiate itself from the rest of its competitors. It has approached
its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet’s loan is
long term and it has met all repayments on time. The overdraft has increased significantly over the year and the
directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will
be renewed.
58 Questions